In re Vaxart, Inc. Securities Litigation

Background

The plaintiffs are investors who alleged that Vaxart, Armistice, and various officers and directors violated Section 10(b) of the Securities Exchange Act and Rule 10b-5. The allegations concerned Vaxart press releases issued on June 25 and June 26, 2020. One release described an arrangement involving the potential production of a billion or more COVID-19 vaccine doses. The other stated in its headline that Vaxart’s vaccine candidate had been selected for the federal government’s Operation Warp Speed, while the text explained that Vaxart had been selected to participate in a non-human primate study.

Vaxart’s stock price rose after the announcements, and Armistice sold nearly all of its Vaxart shares. A New York Times article published about a month later reported concerns that companies including Vaxart had exaggerated their roles in Operation Warp Speed and included a statement that the Department of Health and Human Services had not entered funding agreements or negotiations with Vaxart. Vaxart’s stock price dropped after the article.

The plaintiffs later reached a class-wide settlement with Vaxart and various Vaxart officers and directors. The Armistice defendants remained, and the plaintiffs sought certification of a class consisting of investors who bought Vaxart securities from June 25 through July 24, 2020.

Class-Certification Arguments

For class certification, the plaintiffs needed to provide evidence that liability could be resolved for the class as a whole and that damages could be measured using a class-wide method. They argued that all class members overpaid because the alleged fraud entered the market after the press releases and remained until the New York Times article. Their expert, Dr. Matthew Cain, analyzed the unusual stock-price increase after the press releases and the unusual stock-price decrease after the article. He proposed measuring damages by examining the stock-price response to corrective disclosures, including the New York Times article and, as later argued, Securities and Exchange Commission filings disclosing Armistice’s sales.

The defendants primarily argued that the press releases had no effect on Vaxart’s stock price. They relied on Dr. Jennifer Marietta-Westberg, whose analysis concluded that the price decline after the New York Times article was not highly unusual and had no material effect on the stock price. The court explained that this analysis did not address whether the press releases affected the stock price immediately after they were issued.

Court’s Analysis

The court concluded that both sides focused too narrowly on the New York Times article. Unlike a typical securities-fraud case involving a later, sudden revelation of concealed truth, the Vaxart releases contained both misleading headlines and more accurate explanatory text. The court said the evidence did not support assuming that the public remained completely unaware of Vaxart’s actual role until the New York Times article or the Securities and Exchange Commission filings.

The court identified possible scenarios in which the alleged price inflation gradually declined as the market learned more about the releases, or in which the effect of the alleged fraud was short-lived. The court referred to the gradual dissipation of fraud-related price inflation as “leakage.” It also noted a possible third scenario: that the misleading statements had no effect on the stock price and that the market instead reacted to accurate information in the releases. The court did not resolve which scenario occurred.

The plaintiffs had not provided evidence showing that every investor during the proposed month-long period was affected in the same way. Their analysis of the later price decline did not show whether the market began adjusting earlier. The court also found that their damages model did not explain how to measure declining inflation over time or account for potentially different inflation levels for investors who bought at different points during the proposed class period.

Disposition

The court denied the motion for class certification without prejudice. It allowed the plaintiffs to file one renewed motion based on the actual facts and evidence of the case rather than assuming that the alleged inflation remained constant until the New York Times article. The renewed motion was due within 28 days of the order, with the opposition due 28 days later and the reply due 21 days after that. The order decided the class-certification request; it did not decide the ultimate securities-fraud claims.